Wednesday, April 9, 2014

Trading against this mentality is easy.

I posted a comment earlier on Real Money's Columnist Conversations. (I am a columnist over at Real Money.) I said that the yen was poised for a huge rally because the April 1 tax increase, which was the first in 17 years, would trigger a short squeeze. There are a huge amount of speculative short yen positions and they're really vulnerable.

This is basic MMT. When a government taxes it removes income/currency/reserves from the economy making the currency harder to get. When you have lots of shorts and the government is taking away yen, guess what? You have the makings of a massive short squeeze.

Anyway, in response to my post one of the other columnists chimed in with this remark:

"How does sticking consumers with a 60% increase in VAT make the Yen more valuable?"

So this person obviously doesn't get it. This is what you are up against. Pretty easy. When you understand MMT and learn some trading strategies and get your mental game together (extremely important, the mental game) you literally cannot lose. It becomes like taking candy from a baby.

This is what I teach. This is why I can run a client's account up 80% in six weeks.


10 comments:

The Rombach Report said...

"This is basic MMT. When a government taxes it removes income/currency/reserves from the economy making the currency harder to get. When you have lots of shorts and the government is taking away yen, guess what? You have the makings of a massive short squeeze."

Mike - I get this. I really do. However, I question if making yen or any currency harder to get will necessarily make that currency to appreciate against other currencies. Allow me to play devil's advocate and put on my Supply Side hat for a moment and ask you what if a tax increase of the magnitude set to go into effect in Japan reduced demand for yen because the after tax return on capital was consequently reduced. I think it may be that under some circumstances the MMT interpretation may explain the currency movement associated with a tax increase while in other political and economic environments the Supply Side model may work better.

mike norman said...

Ed,

Check out any country that instituted a big tax increase or, austerity and look what happened to their currency.

Look at what happened to Latvia and Estonia when they had to implement massive austerity as a condition for joining the euro. Their economies tanked (after tax returns, in your words, tanked). Output collapsed by 25%-40%, and their currencies soared. Austerity, taxes, etc make the currency harder to get.

If you don't believe it works this way, go short the yen.

The Rombach Report said...

Fair enough, but how about the US in the 1980s? Taxes were cut amid large budget deficits and the dollar soared. I think that demand for the dollar had something to do with the perception that there was a lot of opportunity to make money in the 1980s. That demand for the dollar was borrowing driven which was reflected in rising real interest rates despite falling nominal interest rates.

mike norman said...

The dollar soared in the late 80s? You must be thinking of the late 90s into 2002 and that was because we ran a surplus. (Makes dollars harder to get.)

Dollar Index.

mike norman said...

Ed, this is very easy. If you think it has nothing to do with what I am saying, go ahead and short the yen. You're free to do so.

Matt Franko said...

Trade weighted dollar index:

http://research.stlouisfed.org/fred2/graph/?id=TWEXMANL,

DI went up early 80s and then crashed as japan probably cut back fiscal late 80s and fomented their own late 80s asset top...

rsp

The Rombach Report said...

"Ed, this is very easy. If you think it has nothing to do with what I am saying, go ahead and short the yen. You're free to do so.

Hah! Nice try Mike, but I'm not taking the bait. I tend to agree with you that when a currency becomes harder to get it makes sense that it would be bid up in the FOREX market and the late 1990s surplus is a prime example of that and one I use frequently to illustrate the toxic effects of a budget surplus on an economy. After all as the $ Index chart Matt Franko supplied shows the DXY peaking at 107.87... a lot higher than current level around 79.55.

Problem is the same chart shows the $ Index peaking at 133.55 in 1985 (Pre-Plaza Accord) when the deficit weighed in at $221.5 billion or 5.3% of GDP. Real interest rates were rising in the 1980s even though nominal interest rate were trending lower, so that would at least partly explain the sharply stronger dollar. I think rising real interest rates were simply a reflection loan demand which was robust throughout the 1980s as the chart of Commercial & Industrial (C&I) loans from the St. Louis Fed shows.

http://research.stlouisfed.org/fred2/series/BUSLOANS/

My point is that it's not all that intuitively obvious that MMT always explains the relative strength or weakness of the dollar.

mike norman said...

Ed, you're right about one thing: MMT doesn't explain the madness of crowds and how far markets can be pushed far from their fundamentals because of market particpants' beliefs. Case in point: the rally in gold on the view that QE would cause hyperinflation.

MMT does explain reality, however. And eventually reality wins.

The market psychology part is also what I have learned as a trader and it's what I teach as well.

The Rombach Report said...

Mike - I see your point.

Jose Guilherme said...

This is basic MMT. When a government taxes it removes income/currency/reserves from the economy making the currency harder to get

Maybe basic - but certainly one of the most important insights provided by MMT.

And very easy to understand, even by people who swallowed the myths about the dangers of "running out of money".

Maybe one should design - for maximum effectiveness - an introductory course on MMT starting with insights such as these to then slowly proceed towards the more counter-intuitive aspects of Modern Money.